Should I Invest In Diageo Plc Now?

Can Diageo plc (LON: DGE) still deliver a decent investment return?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

DiageoIn recent news, Diageo (LSE: DGE) (NYSE: DEO.US) plans to take full global ownership and control of Tequila Don Julio from Casa Cuervo, a firm that currently also partners with Diageo to produce and distribute the Smirnoff brand in Mexico.

As part of the deal, Casa Cuervo will give up Smirnoff and gain another Diageo brand, Bushmills, instead.  

Going for the highest growth

The transaction will swell Diageo’s coffers to the tune of $408 million and should complete during early 2015. However, although the firm plans to pay down some of its debt with the money, it’s not really about the cash, it’s about Diageo pursuing its fastest-growth options.

Diageo’s Chief Executive reckons the deal secures the company’s place in the growing super and ultra-premium segments of the tequila category and further strengthens Diageo’s leading position in Mexico, where the growth of spirits is one of the drinks sector’s biggest growth opportunities.

Headwinds in emerging markets have stalled growth of late, so adjusting the firm’s portfolio for value seems like an astute move. Diageo sees its future in up-and-coming areas such as Mexico and in fledgling markets generally. Around 36% of operating profit came from fast-growing markets last year, so progress in newly affluent regions of the world is significant for Diageo shareholders.

Cash flow needs to catch up

The price for Diageo’s often-acquisitive progress in growth markets seems to be lacklustre cash flow and rising debt, so the recent Mexican deal delivers some welcome capital to pay down debt:

Year to June

2010

2011

2012

2013

2014

Net cash from operations (£m)

2298

2183

2093

2048

1790

Borrowings (£m)

8764

8195

8629

10,091

9214

Debt divided by cash flow

3.8

3.8

4.1

4.9

5.2

The share price is back down to where it was around two years ago at today’s 1818p. It seems that sluggish cash flow and downbeat forward numbers for earnings’ growth is forcing Diageo’s valuation compression.

Perhaps the Tequila deal will be one element that helps to reinvigorate Diageo’s cash flow performance in the coming years. In the meantime, P/E reduction could drag against capital-growth for Diageo investors with no short-term relief on the horizon as the catalysts for a near- term recovery of consumer spend in the emerging markets remain weak.

Power brands

Yet, despite short-term trading weakness, the future growth drivers for the industry remain undiminished and Diageo’s powerful brands such as  Johnnie Walker, Crown Royal, J&B, Buchanan’s, Windsor, Ketel One Vodka, Ciroc, Captain Morgan, Baileys, Tanqueray and Guinness, with their cast iron repeat-purchase credentials, should drive  cash-flow growth in the medium- and long-term.

The forward P/E rating runs at just under 19 for 2015 and there’s a forward dividend yield of 3%. That doesn’t sound cheap for a business expecting to grow its earnings just 1% that year, but Diageo remains a quality investment proposition and quality comes at a price.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Fancy a 13.9% dividend yield? Consider these dirt-cheap investment trusts!

These investment trusts are trading at whopping discounts to their net asset values (NAVs). Here's why they could prove to…

Read more »

Investing Articles

If the market shut down for 10 years, I’d be happy to hold these 2 FTSE 100 shares

Our writer reveals a pair of FTSE 100 shares that he reckons are well set up to deliver strong returns…

Read more »

Investing Articles

Surely, the Rolls-Royce share price can’t go any higher in 2025?

The Rolls-Royce share price was the best performer on the FTSE 100 in 2023 and so far in 2024. Dr…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

Here’s how an investor could start buying shares with £100 in January

Our writer explains some of the things he thinks investors on a limited budget should consider before they start buying…

Read more »

Investing Articles

Forget FTSE 100 airlines! I think shares in this company offer better value to consider

Stephen Wright thinks value investors looking for shares to buy should include aircraft leasing company Aercap. But is now the…

Read more »

Investing Articles

Are Rolls-Royce shares undervalued heading into 2025?

As the new year approaches, Rolls-Royce shares are the top holding of a US fund recommended by Warren Buffett. But…

Read more »

Investing Articles

£20k in a high-interest savings account? It could be earning more passive income in stocks

Millions of us want a passive income, but a high-interest savings account might not be the best way to do…

Read more »

Investing Articles

3 tried and tested ways to earn passive income in 2025

Our writer examines the latest market trends and economic forecasts to uncover three great ways to earn passive income in…

Read more »